Insurance Providers Rethink Their Approach to Crypto; Embedded Finance with APIs; Full decentralization How to decentralize DeFi and other simple apps
In this edition
- Insurance Providers Rethink Their Approach to Crypto
- Investor’s guide to crypto cards
- Achieve growth at scale through social
- Opportunities abound for fintechs solving unmet needs in ecommerce
- Embedded Finance with APIs
- From banking app to lifestyle app
- Full decentralization: How to decentralize DeFi and other simple applications
Insurance Providers Rethink Their Approach to Crypto
After years on the sidelines, the insurance industry is increasingly embracing the digital assets sector.
Many crypto exchanges and custodians have for years been unable to get insurance or shied away from getting it because of high premiums stemming from a dearth of insurers willing to underwrite the industry’s risk. Some big exchanges have chosen to insure themselves instead.
But that is slowly changing, as the traditionally risk-averse insurance industry — from big brokers to new startups — dips its toes into the water by setting up new teams focusing on cryptocurrency, hoping to profit from the industry’s rapid growth.
U.K. startup and Lloyd’s of London licensed broker Superscript earlier this month launched a crypto insurance product called Daylight that will cover technology liability and cyber insurance, the company said. It plans to expand coverage this year to include directors and officers, custodianship and crypto mining.
The shift comes as the crypto market saw another wave of turmoil in recent weeks, a reminder of the highly volatile nature of an industry that still lacks significant oversight and investor protections. As traders take flight from risky investments amid rising interest rates and high inflation, more than $1 trillion in digital money has vanished since November.
The demand for digital assets insurance also reflects a step in the evolution of the crypto industry, whose early supporters often expressed skepticism of the Wall Street establishment and government regulations. The industry has been grappling with rising regulatory scrutiny while looking for ways to gain credibility with the public and investors and to attract more mainstream adoption.
Crypto firms typically look to insure against a loss of funds held by the exchanges on behalf of clients in case of incidents such as external thefts and employee thefts. They also often take out directors and officers insurance that protects executives and the companies from costs related to investigations or litigation, as well as cybersecurity insurance against hacks and professional liability insurance to protect against claims of negligence.
Investor’s guide to crypto cards
Crypto credit cards are very similar to any other credit card. You make purchases using a line of credit, earn rewards, and pay back what you owe at a certain interest rate. What makes crypto cards different is they give you a direct line of credit by using your digital assets as collateral, removing the need for a credit check.
The inability to use cryptocurrency to buy everyday goods is a common criticism. But with crypto credit cards, the user doesn’t notice a difference at the Trader Joe’s checkout line. That direct line of credit can offer instant liquidity of their crypto portfolio.
The case for crypto cards
On a recent episode of Empire, Jeff Dorman reminded us that 20 years ago, people were afraid to put their credit card in a machine. Today we can’t imagine our lives without these magic rectangles. With some countries adopting bitcoin as legal tender and innovations like crypto cards, the question of wide adoption is not if, it’s when. But this inevitability is not the only reason to use a crypto credit card.
Earn crypto rewards
There are many rewards cards giving cash back, travel points or other kinds of loyalty points for goods and services. Crypto credit cards offer rewards in crypto. This is a great way to stack sats or other cryptocurrencies without having to buy them on an exchange. While rewards differ from card to card, it’s easy to see the potential upside when crypto has a history of appreciating over time and fiat has a history of decreasing in value.
Bridge TradFi and DeFi
In the last several years, crypto adoption has shot through the roof, mirroring the adoption curve of the internet back in the ’90s. But even today, it can be difficult for new users to understand how to get started with digital currency. Crypto credit cards are a familiar way for people to begin investing in crypto without having to spend weeks educating themselves about the ecosystem. What Robinhood did for stock investing, crypto credit cards can do for crypto adoption.
Adoption barriers to crypto cards
The taxable event
Most crypto cards create a taxable event every time you make a purchase. Because most governments classify cryptocurrencies as property instead of foreign currency, they are subject to capital gains. So if you were to use a crypto debit card to buy a $5 mothers day card and your portfolio is up 100%, that gesture will have an expensive tax bill.
Price volatility
Many investors are hesitant to use crypto cards because of major price swings and volatility. They not only want to avoid paying capital gains, they want to avoid missing out on potential gains. This mindset is why many view crypto largely as a store of value rather than a currency. This is why platforms such as Nexo are innovating ways investors can use their crypto without missing out and paying capital gains each time they make a purchase.
Achieve growth at scale through social
According to DataReportal, the number of active social media users increased from 3.96 billion to 4.65 billion around the world between July 2020 and April 2022, equating to 58.7 % of the world population.
The volumes and transaction values of such P2P social payments are increasing, in part because the use of social media also continues to grow. However, a majority of brands and retailers have been underestimating the wider adoption of C2B payments on social media across the U.S. and Europe , where the counterparts in the East are unarguable leaders in C2B payments. WeChat, a popular App in China, embodies a huge ecosystem of payment services where users can order food, book a plane ticket and hail a ride in order to drive revenue through one App.
In 2021, shopping graduated from a real-world consumer activity that they did occasionally, to something they’re doing all the time, even if they’re not aware of it. Mass adoption of new offerings will depend on the ability to tap into and leverage social networks, providing the true scale and accessibility required for digital payments to truly skyrocket.
According to the global study by Kantar, which surveyed more than 25,000 consumers across 30 countries and found that social media engagement has grown by 61 % during the pandemic, 58 % of Gen Z and Millennial users (13–37) are interested in purchasing items directly from their feeds. These numbers can be proved by the FIS 2020 Power Your Payments report with insights from 33,000 respondents across 12 markets, and discovered that 53% had paid for a purchase via a social media platform.
The opportunity: Payments technology will play a key role in enabling these seamless, effortless experiences for business-to-business and business-to- consumer users.
Thanks to increased commercialisation, every social media platform, newsfeed, post, group, or story can be a sales channel. As a result, social commerce has levelled the playing field between millions of merchants and casual sellers.
In-feed shopping capabilities will increase to serve those who sell goods, while social media platforms will embrace creator payments on a wider scale to make it easier for those who provide services or create content to receive remuneration or even ad revenue share.
Opportunities abound for fintechs solving unmet needs in ecommerce
Currently, a merchant’s product journey involves three pillars: 1) sourcing and/or manufacturing goods (“supply chain”), 2) selling those goods (“selling”), and 3) engaging with customers after their purchase (“post-purchase”).
In the supply chain leg of the product journey, there is a massive opportunity to help ecommerce-specific merchants with accounts payable, invoice factoring, and bill pay. Today, most merchants normally rely on Bill.com or manual, email-based processes to issue payouts. Merchants must also deal with a cash-flow crunch, as they often have to pay a deposit upfront to their manufacturing partners and do not capture the full revenue potential from that supply for up to 3 months.
Companies like Settle and Wayflyer have shown there is massive demand to help with this issue, and companies that can use this wedge to become an operating system for ecommerce merchants will find success. Additionally, as merchants source products from all over the world, they need better global know-your-business (KYB) tools to understand the risk levels of partnering with international entities.
In the selling leg, there is still an open playing field for fintech companies that are enabling consumer-friendly offerings such as “Target Red Cards as a Service.” With programs like these, merchants essentially build a closed-loop relationship with their customers. This simultaneously increases conversions, saves merchants on card network-related fees, and rewards customers.
There is a major need for fraud-protection services for merchants within the selling leg. While plenty of startups already offer fraud protection services to ecommerce companies, bad actors are continuously evolving as well. New startups that have an edge on capturing the most relevant signals — such as biometric, behavioral, identity, etc. — will continue to thrive. In a related field, merchants also need solutions for payment declines and increasing conversions, which may be a result of perceived non-sufficient funds (NSF) risk or a mismatch in risk tolerance between merchants and issuers.
On the post-purchase side, there is an opportunity for fintech companies to help merchants build stronger relationships with customers and increase average order value (AOV) and conversion. Merchants can partner with fintech companies to offer embedded insurance/warranty, help customers return products more easily, and also provide faster and alternative access to customer refunds, which still typically take 3–10 business days.
While these fintech opportunities may seem incremental vs. providing a step-function change (such as Stripe giving merchants the ability to accept payments online), the pandemic significantly accelerated ecommerce penetration, providing an opportunity for new startups to emerge tackling the aforementioned gaps along the ecommerce product journey.
Embedded Finance with APIs
Faced with changing customer behaviors and demands, tightening margins, and increasing threat from digital competitors, financial services institutions (FSIs) will need to meet customers where they are, open up their services, and establish new ways to monetize their products. Doing so will also enable them to build a better profile of their customers, and deliver more personalized user experiences and fast, convenient banking and payment services. Cloud technology plays a big role in this shift toward digital FSIs.
In Asia, bank branches now account for just 12% to 21% of monthly transactions in the region, with customers turning to digital channels for routine transactions such as peer-to-peer transfers and bill payments, according to McKinsey & Company. Overall customer engagement has climbed from an average 12.7 to 14.9 transactions a month in Asia’s developed markets, and from 6 to 8.1 in emerging markets.
From banking app to lifestyle app
Imagine, you are about to go home after a long working day. It is pouring outside, you start to feel hungry, but you don’t feel like cooking. Just at that moment, you received a notification from your banking app, and you are offered 30% off when ordering takeaway from their partner restaurants.
Imagine, when you are going on holiday and arrive at the airport for departure, you would receive a message from your bank, reminding you to turn on travel insurance.
After arriving in the foreign country where you’ll be staying, your bank notifies you where you can draw cash without charge, and be rewarded for swiping your card at partner hotels and retail stores.
Imagine a holiday when your bank offers you an interest-free 30-day overdraft just as you need it.
At the end of the trip, when you arrive at the airport to return home, you are offered free airport lounge access and the opportunity to join your bank’s premium travel rewards program.
Personal Banking will never be the same again.
Proof of this can be seen with the recent and exciting announcement that Belgium’s largest bank, KBC, bought the media rights to broadcast Belgian soccer goals and highlights in their mobile app, because soccer is the prime activity and entertainment sport in Belgium.
This is not the first time we’ve seen bold moves like this either, Tinkoff , in Russia, has purposefully built a super app that provides customers access to their growing ecosystem of financial and lifestyle services. OTP Bank in Hungary allows their customers to purchase train tickets in-app.
The mobile phone as a proxy to your customers’ real-world lives
With everyone carrying a mobile phone in their pocket, companies are constantly competing for peoples’ limited time and attention. The way to win the game is to create relevant engagement and offerings for your users, and make their life easier. The more time users spend in an application, the more that company can learn about that customer and provide more relevant products and services that deepen engagement, or better said, increase loyalty.
Companies across industries are attempting to create ecosystems where people want and need to spend time. Banks, and certainly the neo-banks, have understood that message and need to create hyper-personalization at scale using the power of smartphones.
How much do banks know about customers?
Knowing your customers nowadays is more than just a fact sheet, it’s about knowing your customers’ lifestyles, personal preferences, life stages, and much more. The secret weapon that the likes of WeChat have, and banks of the future need, is real-time and real-world understanding of who their customers are as they move through their everyday lives. These behavioral insights are crucial for creating relevant engagement and contextual offers to retain your customers.
Are you ready to provide a user experience like this?
Full decentralization: How to decentralize DeFi and other simple applications
Full decentralization is currently the most common model of decentralization within the DeFi sector. As reflected in the images below, the shift from a centralized model (as in web2) to a decentralized model (as in web3) involves:
- deploying an open-source smart contract protocol to a decentralized and programmable blockchain network to form the core infrastructure layer of the web3 system — the smart contract protocol provides an execution layer for all of the components of the backend that can be deployed on-chain (i.e., payments, messaging, etc.);
- operating a “client” layer in a decentralized manner — the client represents all of the system’s software that operates off-chain, and acts as a gateway to the smart contract protocol (clients can range from being simple frontend websites to complex applications);
- adding digital assets distributions — this could be an airdrop to contributors and consumers; issuances to insiders (employees, advisors, and stockholders of the developer company); the allocation of digital assets to an explicit incentivization scheme (such as liquidity mining in DeFi); and the formation of a treasury controlled by the DAO, to be used in connection with any future incentivization;
- launching DAO governance of the smart contract protocol and DAO treasury; and
- ensuring users own and retain their own data (currently a huge contention in web2 systems).
The above steps mostly eliminate the potential for information asymmetries — the impetus for much of the U.S. securities laws — because (1) information about the protocol and its operations are transparently available on a public blockchain ledger, and (2) the managerial efforts of the developer company that launched the protocol are no longer critical to the success or failure of such protocol.
And since the blockchain and smart contract layers are operational and not controlled by any group or entity, the system has full redundancy and is no longer reliant on the developer company. DeFi primitives are a great example of this because they require little to no ongoing development to continue providing users with utility. As a result, protocols implementing this decentralization model could be considered legally decentralized, even without a fully functioning decentralized economy.
